Monday 24 November 2008

5 COMMANDMENTS FOR THE SMALL INVESTOR

5 COMMANDMENTS FOR THE SMALL INVESTOR

Enjoy the five commandments from NDTV Profit:

In the midst of a global financial crisis and tanking stock markets, what should a small investor do? What is apt and what is not? In trying to grapple with this turmoil, is this an opportune moment to buy or sell shares?

Five rules for the small guy:

  1. This is NOT different. History is marred with instances of financial bubbles resulting in extreme volatility. Markets will go up and down.
  2. Sell when everyone is buying, buy when everyone is selling.
  3. Stick to quality shares.
  4. Use systematic investment planning.
  5. Never, never, never put money into the stock market that you may need urgently and cannot afford to lose.

I tend to agree with the above commandments. Some additional commandments of my own:

  1. When you are in a bull market frenzy and for some strange reason you wish to stay invested in equity markets, choose low beta stocks with consistent dividend paying track record
  2. Be open to doing just the opposite when you are in the throes of a bear market. Be willing to buy very high beta (but frontline stocks) which are likely to have fallen much more than their low beta counterparts.

Regards,

N


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Monday 17 November 2008

Pygmalion Effect

Pygmalion Effect

Recently happened to read the anonymous comments of a supposedly senior fund manager (and presumably an expert):

Many of us might wonder about the dichotomy between the public and private statements by the fund manager. In fact, some of us might even think that it is unfair on the part of the fund manager to express such contradictory views.

However, I'm reminded of the famous movie "My Fair Lady" and the Pygmalion Effect. If the fund manager indeed expresses his concerns for the funds crunch, liquidity crisis, redemption pressures faced by him, etc. in an open forum, the obvious result will be a run on the fund (similar to a run on a bank, NBFC, etc.). When there is a full-fledged run on a financial entity, be it a bank or an NBFC or a mutual fund, our basic Economics Lessons learnt in +2 will enlighten us that it is impossible for even the strongest entity to survive.

Hence, in such a situation, it becomes a moral duty of the fund manager, the CEO of the entity, the Regulators, the Finance Minister, etc. to express truthful yet positive opinions about the situation. If not, the resultin chaos will not only bankrupt the specific mutual fund scheme, NBFC, Bank, etc., but also result in a whole lot of eminently avoidable pain for a whole lot of retail investors.

"Men often become what they believe themselves to be. If I believe I cannot do something, it makes me incapable of doing it. But when I believe I can, then I acquire the ability to do it even if I didn't have it in the beginning." - Mahatma Gandhi

Regards,

N


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Thursday 13 November 2008

Getting to know more about the root cause of our Financial Meltdown

Getting to know more about the root cause of our Financial Meltdown

I've been reading hell of a lot these days about the bear market that we're suffering, past bear markets, potential solutions, etc. Many of the articles sound impressive. However, the one that's given below apparently gets to the root cause:

One of the most educative pieces that I've come across thus far!

Regards,

N


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Monday 10 November 2008

Dangers of investing based on Index levels

Dangers of investing based on Index levels

I've been a long term fan of Parag Parikh. You ought to listen to him on why it can be dangerous to invest purely based on Index levels. And, also why index funds need not necessarily be a great idea!

Read this link:

In the Indian context (I only know about India - It is probably true anywhere in the world ...), bottom up investing is always much better than a top down approach. Top down approach and index based investing is perhaps better suited to lazy fund managers.

Regards,

N


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Tuesday 4 November 2008

What happened to the experts

What happened to the experts

Here's an interesting link giving an idea of what happened to 5 top fund managers over the last five years (4 years of bull run and a few months of a bear phase):

You can review your own performance vis-a-vis the experts to get an idea of how you fared!!!

Regards,

N


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Mistakes of a well-known expert (And lessons for us!)

Mistakes of a well-known expert (And lessons for us!)

Read this portion of an interview. If you have the time, you can read the whole interview using the link given below:

The excerpt given below pertains to Mr. Sandip Sabharwal, one of the best-known and highly respected fund managers in India.

SANDIP SABHARWAL:

"I had turned very bearish on the markets last year in October-November. At that time, we had increased the cash allocation in our funds to over 20%.

However, the Indian markets continued to rally even as most other markets were correcting. By January 2008, we took a call that the markets will rally a bit more before correcting and deployed our cash in the markets. Just after that, the markets started correcting sharply.

Besides, most of our funds had a reasonable mix of mid-cap stocks, which corrected much more sharply during the initial phase of the market fall.

Frankly, I had expected a 30% kind of fall from the top, and not the 60% that we have actually seen.

As a strategy, nine months ago, we shifted our portfolio to companies with strong cash flows and those that do not need to raise capital in the immediate future for their growth. The companies in our portfolios are still growing strongly and we believe will outperform the markets as the situation stabilizes."

The full interview:

My take:

If a guy like Sandip Sabharwal can make two crucial (and extremely costly) mistakes and still succeed, so can we. His mistakes, as evident from the above interview excerpt:

  • He became bearish in October / November 2007 & increased cash levels but changed his view and deployed cash in January 2008
  • Later he expected a 30% kind of fall from the peak levels, and not the 60% plus fall that we have actually seen. (Obviously, this means that he has once again invested heavily at around 14000-15000 levels on the sensex, only to take a severe beating - just like the rest of us)!

We all still have some hope, I guess!

Moral of the story:

As all value investing gurus keep emphasising, nobody can predict short term movements of stock prices.

We just have to be disciplined enough to

  • look at margin of safety
  • invest for the long term
  • keep booking profits periodically
  • keep reviewing our portfolio regularly (though obviously not daily/weekly)
  • stick to our asset allocation plans and
  • execute all our noble intentions meticulously

Happy investing!

Regards,

N


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